Single-Family Housing: Stronger Measures Needed to Encourage Better
Performance by Management and Marketing Contractors (Letter Report,
05/12/2000, GAO/RCED-00-117).

Pursuant to a congressional request, GAO provided information on the
Department of Housing and Urban Development's (HUD) management and
marketing contracts of single-family housing, focusing on HUD's: (1)
experience with the contractors who manage and market these properties;
and (2) progress in reducing its single-family property inventory.

GAO noted that: (1) the central focus of HUD's management and marketing
contracts is on getting properties sold; (2) in response, contractors
have been increasingly aggressive at selling properties by using the
Internet and other mechanisms to publicize the properties; (3) however,
HUD has experienced problems with these contractors on a number of
fronts; (4) since the contracts became effective in April 1999, 6 of the
7 contractors have had significant problems with carrying out their
responsibilities particularly in regard to securing and properly
maintaining the properties assigned to them; (5) for example, Intown
Management Group, which had 7 of the 16 contracts involving about 40
percent of the properties, had problems with meeting almost all of HUD's
performance requirements; (6) after trying unsuccessfully to secure
better performance from InTown, HUD terminated all seven of the firm's
contracts; (7) HUD selected three replacement contractors from among the
remaining firms to absorb most of Intown's workload; (8) however, two of
the three contractors that HUD selected were already having performance
problems under their existing contracts; (9) HUD staff have limited
contractor incentives or tools available--short of terminating
contracts--to enforce contractors' compliance and improve performance;
(10) HUD's inventory of acquired single-family properties at the end of
fiscal year (FY) 1999 was 32 percent higher than it was a year earlier
and over 100 percent higher than it was at the end of FY 1996; (11)
HUD's new management and marketing contractors increased the total
number of properties sold from the inventory during FY 1999, and the
total number of properties in the inventory has now begun to decline;
(12) however, the contractors have made relatively little progress
disposing of older properties--properties in the inventory 6 months or
longer; (13) in fact, as of February 2000, about 20,000 of HUD's
properties were in the inventory 6 months or longer--up from 13,000
properties in April 1999, the first month of the contracts; and (14)
while HUD encourages contractors to sell properties quickly, it does not
provide incentives for the contractors to focus on properties that have
been in the inventory for a long period of time.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-00-117
     TITLE:  Single-Family Housing: Stronger Measures Needed to
	     Encourage Better Performance by Management and Marketing
	     Contractors
      DATE:  05/12/2000
   SUBJECT:  Housing programs
	     Contract administration
	     Contract performance
	     Foreclosures
	     Marketing
	     Property disposal
	     Federal property management
	     Mortgage programs
IDENTIFIER:  Internet
	     HUD Single Family Acquired Asset Management System

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GAO/RCED-00-117

Appendix I: Comments From the Department of Housing and Urban Development

32

Appendix II: Contractors' Performance Dimensions to Be
Reviewed by Homeownership Center Staff

39

Appendix III: GAO Contacts and Staff Acknowledgments

43

Table 1: High Risk Performance Dimensions for Contractors
in June and November 1999 12

Table 2: Property Maintenance Problems Noted by HUD in the
November 1999 Assessment Reports 14

Figure 1: HUD's Inventory of Single-Family Properties at the
End of Fiscal Years 1996-99 5

Figure 2: Contract Areas 8

Figure 3: Unmaintained Washington, D.C., Property 15

Figure 4: Vandalized Philadelphia Property 16

Figure 5: Vandalized Electrical Box on California Property 17

Figure 6: Number of New Acquisitions Into the Inventory
Compared With Sales by Month Since the
Implementation of Management and Marketing Contracts 22

Figure 7: Percentage of Properties by Length of Time in HUD's
Inventory in April 1999 Compared With Percentage
in February 2000 25

FHA Federal Housing Administration

GAO General Accounting Office

HUD Department of Housing and Urban Development

Resources, Community, and
Economic Development Division

B-284059

May 12, 2000

The Honorable Rick A. Lazio
Chairman
Subcommittee on Housing and
Community Opportunity
Committee on Banking and Financial Services
House of Representatives

The Honorable Wayne Allard
Chairman
Subcommittee on Housing and
Transportation
Committee on Banking, Housing and
Urban Affairs
United States Senate

Every year, thousands of borrowers default on their single-family mortgage
loans insured by the Department of Housing and Urban Development's (HUD)
Federal Housing Administration (FHA).1 When borrowers default, lenders may
foreclose on the properties for which the loans were secured, file claims
against the FHA insurance program, and convey the properties to HUD. In
fiscal year 1999, HUD acquired over 70,000 properties through these
foreclosures. If HUD's acquired properties are not properly secured,
maintained, and resold, they can become eyesores and may contribute to a
neighborhood's decay--particularly as they age.

At the end of calendar year 1999, approximately 19,000 of 49,000 properties
were in HUD's inventory for 6 months or longer--HUD's Inspector General
estimated that these properties may be worth as much as $1.6 billion. These
properties may lose market value as they age. In response to widespread
problems with the maintenance of single-family properties reported by HUD's
Inspector General and us,2 HUD began contracting out the management and
marketing of its single-family property inventory in March 1999 and awarded
a total of 16 such contracts. The contractors are responsible for
inspecting, appraising, securing, maintaining, and selling the properties.
For these services HUD pays the contractors a fee that is based on a
percentage of the property's price. HUD pays the contractors 30 percent of
their fee when they list the properties for sale and the remainder of the
fee when they are sold. Concerned about HUD's disposition of these
properties, you asked us to (1) describe HUD's experience with the
contractors who manage and market these properties and (2) provide
information on HUD's progress in reducing its single-family property
inventory.

The central focus of HUD's management and marketing contracts is on getting
properties sold. In response, contractors have been increasingly aggressive
at selling properties by using the Internet and other mechanisms to
publicize the properties. However, HUD has experienced problems with these
contractors on a number of fronts. Since the contracts became effective in
April 1999, six of the seven contractors have had significant problems with
carrying out their responsibilities particularly in regard to securing and
properly maintaining the properties assigned to them. For example, InTown
Management Group, which had 7 of the 16 contracts involving about 40 percent
of the properties, had problems with meeting almost all of HUD's performance
requirements. After trying unsuccessfully to secure better performance from
InTown, HUD terminated all seven of the firm's contracts. HUD selected three
replacement contractors from among the remaining firms to absorb most of
InTown's workload. However, two of the three contractors that HUD selected
were already having performance problems under their existing contracts. HUD
staff have limited contractor incentives or tools available-- short of
terminating contracts--to enforce contractors' compliance and improve
performance.

HUD's inventory of acquired single-family properties at the end of fiscal
year 1999 was 32 percent higher than it was a year earlier and over 100
percent higher than it was at the end of fiscal year 1996. (See fig. 1.)

Figure 1: HUD's Inventory of Single-Family Properties at the End of Fiscal
Years 1996-99

Source: GAO's analysis of data from HUD.

HUD's new management and marketing contractors increased the total number of
properties sold from the inventory during fiscal year 1999, and the total
number of properties in the inventory has now begun to decline. However, the
contractors have made relatively little progress disposing of older
properties--properties in the inventory 6 months or longer. In fact, as of
February 2000, about 20,000 of HUD's properties were in the inventory 6
months or longer--up from 13,000 properties in April of 1999, the first
month of the contracts. While HUD encourages contractors to sell properties
quickly, it does not provide incentives for the contractors to focus on
properties that have been in the inventory for a long period of time.

This report makes recommendations designed to improve the effectiveness of
HUD's contracts for managing and marketing acquired single-family
properties. While HUD agreed with some of our findings and disagreed with
others, it did not comment on our draft report's recommendation. HUD does
not believe that the draft report adequately recognizes many of the
improvements that the program has achieved since HUD terminated InTown's
contracts. We believe that our report presents a proper balance between what
the program has accomplished and the shortcomings that it is still
experiencing. For example, our report recognizes the improved sales
performance by the contractors and the resulting decrease in HUD's property
inventory. At the same time, our report notes that the percentage of
properties in HUD's inventory for 6 months or longer has increased and that
problems with the contractors' maintenance of the properties have persisted.
Accordingly, we have not revised our report.

Established by the National Housing Act, HUD's Federal Housing
Administration provides hundreds of thousands of homebuyers with federally
backed mortgage insurance. The mortgage insurance helps finance home
purchases, many of them for low-income and first-time homebuyers, by
insuring private lenders against losses on mortgages for single-family
homes. From fiscal year 1997 through fiscal 1999, the number of
single-family mortgage loans insured by FHA grew each year from
approximately 800,000 to nearly 1.3 million--a 62-percent increase. For the
3 years combined, FHA insured over 3 million mortgages with a total value of
$291 billion.

Most of these mortgages are insured by FHA's Mutual Mortgage Insurance Fund,
which receives revenues through insurance premiums paid by borrowers. If a
borrower defaults on a loan and the loan is subsequently foreclosed, the
lender may file a claim for most of its losses with FHA. The lender
transfers the title to the home to HUD after the claim is paid. HUD manages
and sells the property through its property disposition program. The mission
of HUD's property disposition program is to sell these properties in a
manner that expands homeownership opportunities, strengthens neighborhoods
and communities, and ensures a maximum return to the fund.

As part of an effort to streamline operations and reduce costs, HUD began a
pilot program in 1996 to test the feasibility of contracting out the
management and sales functions of its property disposition program. HUD
determined that the pilot was successful and proceeded with a solicitation
for management and marketing contracts nationwide. A panel evaluated the
proposals on the basis of five selection factors: prior experience, past
performance, management capability and quality control, subcontract
management, and small business subcontracting. The evaluation determined
which proposals offered the best value to the Department by considering the
combined relative merit of these factors.

On March 29, 1999, HUD awarded seven companies a total of 16 contracts to
handle most aspects of its property disposition program across the country.
Each of the contracts covers a different geographic area under the
jurisdiction of one of HUD's four homeownership centers.3 (See fig. 2.) Of
the 16 contracts, 3 are under the Atlanta Homeownership Center's
jurisdiction, 3 are under the Denver Homeownership Center's jurisdiction, 4
are under the Philadelphia Homeownership Center's jurisdiction, and 6 are
under the Santa Ana Homeownership Center's jurisdiction. When the contracts
became effective, they covered 28,741 properties. This was approximately
two-thirds of HUD's total inventory at the time--approximately one-third of
the properties were already in the process of being sold and were not
transferred to the contractors. HUD estimated that it will spend $927
million over a 5-year period for these contracts.

Figure 2: Contract Areas

HUD's statement of work requires contractors to perform all of the
management and marketing duties and responsibilities formerly performed by
HUD. The contractor must inspect the property within 24 hours of assignment
to determine its condition. As part of this inspection, the contractor
determines whether it needs to clean out any debris to eliminate hazards and
to put the property into a presentable condition. The contractor is also
responsible for securing the property to prevent unauthorized entry and to
routinely inspect the property to protect it and keep it in a presentable
condition. As part of the sales process, the contractor is required to
obtain an appraisal of the property no later than 10 business days after HUD
obtains title to the property, use the appraisal to determine the list price
for the property, and list it for sale. The contractor accepts sales offers
and oversees the sales closings. The contractor's responsibilities also
include such administrative tasks as establishing a file for each property,
entering property-related data into the HUD database that tracks the status
of the Department's single-family property inventory (referred to as the
Single-Family Acquired Asset Management System), and reviewing the claims
filed by lenders for reimbursement from HUD. The Department pays the
contractors for these services in two installments--one comprising 30
percent of the total fee when the properties are listed for sale and one
comprising the remaining 70 percent when they are sold.4 According to HUD
officials, the contracts are performance based because contractors are paid
their full fee only if they sell the properties.

The Director of the Real Estate Owned Division in each of the four
homeownership centers is responsible for monitoring contractors' performance
in the respective homeownership center's jurisdiction. Staff in these
homeownership centers are responsible for managing and conducting the
monitoring process and preparing monthly assessments on contractors'
performance. The homeownership centers have a number of resources upon which
they can draw to aid them in making these assessments. For instance, HUD
hired third-party contractors to inspect 10 percent of the properties
handled by each of the management and marketing contractors. Another
national contractor is responsible for reviewing 10 percent of the
management and marketing contractors' property case files each month by
following a HUD checklist. In addition, the homeownership center's program
support staff conduct follow-up property inspections and file reviews on a
10-percent subset of the properties reviewed by HUD's third-party
contractors, as well as a monthly on-site review at the contractors'
offices. The homeownership center staff also use data from HUD's
Single-Family Acquired Asset Management System and input from external
sources, such as consumer groups and municipalities, in making their
assessments.5

According to HUD's contract-monitoring guidance, the homeownership center
staff are to use information from the sources discussed above to prepare a
comprehensive analysis of contractors' performance. As part of the analysis,
the homeownership center staff assigns a risk rating of low, medium, or high
to the contractor's performance on each of 11 dimensions.6 According to
HUD's guidance, a "low risk" rating indicates minor performance problems
that can be easily corrected, which means that no more than 5 percent of the
properties surveyed resulted in findings of noncompliance.7 A "medium risk"
rating indicates a pattern of findings and/or findings that significantly
affect either the Department or the communities that it serves. A "high
risk" rating indicates patterns or continual findings that the contractor
has failed to correct or findings that have a devastating effect on HUD's
assets or the community's interests.

Contractors' Performance

The primary emphasis of HUD's management and marketing contracts is on
getting properties sold. Thus, contractors have been more aggressive at
selling properties, using the Internet and broad listing brokers,8 and using
other services to publicize the properties and enhance sales. For example,
HUD's Southern California contractor has established customer service
offices to work with the realtors in its jurisdiction. However, HUD has
experienced widespread problems with its new management and marketing
contractors on a variety of fronts. Six of its seven contractors have had
significant problems with securing and maintaining the properties assigned
to them, and HUD has noted problems with various aspects of the contractors'
sales processes. InTown Management Group, for example, which had contracts
covering about 40 percent of the properties in inventory, had problems both
with property maintenance and sales. HUD, after trying unsuccessfully to
secure better performance from this contractor, terminated all of its
contracts. HUD selected three of the six remaining contractors to absorb
some of the terminated contractor's workload, even though two of these
replacement contractors were also having performance problems. Although HUD
has identified these performance deficiencies, its efforts--such as phone
calls and deficiency letters--to enforce contractor's compliance, short of
contract termination, have not effectively corrected the problems. HUD has
also had difficulties with monitoring its contractors' performance. For
instance, HUD's oversight assessments of contractors' performance do not
follow a consistent format and do not always determine the level of risk
posed by contractors' performance, making it difficult to compare and track
the performance of contractors over time.

the Contracts' Implementation

HUD's management and marketing contractors experienced start-up problems
after being awarded their contracts. Early assessment reports prepared by
the homeownership centers to evaluate contractors' performance indicated
that most of the contractors had problems with carrying out some of their
responsibilities. For instance, the assessment reports for June 1999--3
months after the contracts became effective--indicate that of the 10
contracts reviewed by the centers that month,9 8 had high risk performance
in at least one of the performance dimensions reviewed.10 Four of the eight
had high risk performance--the potential for adverse impact on the property
disposition program or to the communities where the properties are
located--in two performance dimensions, two had high risk performance in
three dimensions, and one had high risk performance in five dimensions. A
review of the monthly assessment reports prepared by the centers as of
November 1999, the last month for the reports that we reviewed, indicate
that the contractors' performance problems have persisted. The contractors'
performance under 11 of the 13 contracts reviewed was high risk in at least
one of the performance dimensions.11 The performance under five of the
contracts was high risk in three or more performance dimensions. (See table
1.)

Table 1: High Risk Performance Dimensions for Contractors in June and
November 1999

Continued

 Homeownership centerContractor's high risk    Contractor's high risk
 and contract area   performance dimension(s)a performance dimensions in
                     in June 1999              November 1999

 Atlanta                                       Unable to determine. HUD did
                     Contract area under       not produce an assessment
 Area 1              InTown                    report for this contractor
                                               in November
                                               Contract area is the
 Atlanta                                       responsibility of the
                     Contract area under
                                               Atlanta Homeownership Center
 Area 2              InTown                    staff until a new contractor
                                               can be selected.

 Atlanta             Property Maintenance
                                               Property Maintenance
 Area 3              Property Listing for Sale
                     Procedures
                     Property Maintenance
                                               Claims Review
 Denver              Appraisal Procedures and
                     Monitoring                Property Maintenance
 Area 1
                     Single-Family Acquired    Appraisal Procedures and
                     Asset Management System   Monitoring
                     Data Entry
                     Property Maintenance
                                               Claims Review
 Denver              Appraisal Procedures and
                     Monitoring                Property Maintenance
 Area 2
                     Office Processes and      Appraisal Procedures and
                     Procedures                Monitoring
                     Claims Review

                     Property Maintenance      Claims Review

 Denver              Appraisal Procedures and  Property Maintenance
                     Monitoring
 Area 3                                        Appraisal Procedures and
                     Sales Procedures          Monitoring

                     Single-Family Acquired    Sales Closing Procedures
                     Asset Management System
                     Data Entry
 Philadelphia
                     Property Maintenance      Property Maintenance
 Area 1
 Philadelphia
                     b                         None
 Area 2
                                               Property Maintenance
 Philadelphia
                     b                         Sales Procedures
 Area 3
                                               Sales Closing Procedures
                                               Philadelphia Homeownership
 Philadelphia                                  Center staff are responsible
                     Contract area under       for one state in this area
 Area 4              InTown                    and the other three states
                                               were assigned to two
                                               replacement contractors.

 Santa Ana           Property Maintenance
                                               Property Maintenance
 Area 1              Property Listing for Sale
                     Procedures

 Santa Ana           Property Maintenance      Property Maintenance

 Area 2              Appraisal Procedures and  Sales Closing Procedures
                     Monitoring
 Santa Ana
                     b                         Appraisal Procedures and
 Area 3                                        Monitoring
                                               Claims Review
 Santa Ana
                     None                      Property Maintenance
 Area 4
                                               Tax Payment and Invoice
                                               Processing
                     Property Maintenance
 Santa Ana
                     Single-Family Acquired
                                               Property Maintenance
 Area 5              Asset Management System
                     Data Entry
 Santa Ana
                     None                      None
 Area 6

aSee appendix II for an explanation of each of the performance dimensions.

bThe contract that was in effect for this area as of November 1999 became
effective in September 1999. Thus, the June assessment report was for the
previous contractor.

One of the areas in which most of the contractors have had particular
performance problems is that of property maintenance and security.
Contractors' failure to properly secure and maintain the properties assigned
to them may cause a decline in property values and have a negative impact on
surrounding neighborhoods. In the homeownership center staff's monthly
assessment reports of contractors' performance for each month from May
through November 1999, the staff's assessments depict high risk performance
in terms of property maintenance for over half of the contracts reviewed.12
Even in the assessment reports for November--8 months after the initial
contract start-up period--the homeownership center staff noted that over 60
percent of the properties reviewed in some contract areas were in less than
satisfactory condition.

Table 2: Property Maintenance Problems Noted by HUD in the November 1999
Assessment Reports

 Homeownership center/contract Property maintenance problems reported in
 area                          assessment reports
                               Leaking roofs, broken windows, interior
 Atlanta                       debris, exterior debris, unsecured
                               properties, properties not inspected within
 Area 3                        24 hours, and missing initial inspection
                               reports.
                               Unsecured properties; lawn maintenance not
                               done; property not clean inside, outside, or
 Denver                        both; properties not in presentable
                               condition; vandalism; roof leaks and damage
 Area 1                        caused by roof leaks; structural damage; no
                               file evidence of corrective action on
                               hazardous conditions or code violations; and
                               missing routine inspection reports.
                               Unsecured properties; broken windows;
                               incompletely boarded windows; lawn
 Denver                        maintenance not performed; property not
                               clean inside, outside, or both; properties
 Area 2                        not in presentable condition; vandalism;
                               roof leaks; no snow removal; and structural
                               damage.
                               Unsecured properties; initial lawn
 Denver                        maintenance not done; property not clean
                               inside, outside, or both; properties not in
 Area 3                        presentable condition; vandalism; roof
                               leaks; no snow removal; and structural
                               damage.
                               Unsecured properties; lawn maintenance not
                               done; property not clean inside, outside, or
 Philadelphia                  both; properties not in presentable
                               condition; vandalism; roof leaks and damage
 Area 1                        caused by roof leaks; structural damage;
                               defective paint; pool not secured; no snow
                               removal; broken windows; water leak in
                               basement; and no entry key.

 Philadelphia                  Broken windows; property not cleaned; debris
                               removal needed; property not inspected by
 Area 3                        contractor; repairs needed; and defective
                               paint.

 Santa Ana                     Unsecured properties; property not cleaned
                               inside, outside, or not in presentable
 Area 1                        condition; vandalism; broken windows; and
                               unsecured pools.

 Santa Ana                     Properties not secured; roof leaks;
                               vandalism; property not clean inside or
 Area 2                        outside; and property not in a presentable
                               condition.
                               Little documentation of ongoing protection
 Santa Ana                     and maintenance; completion of authorized
                               repair or maintenance work not documented;
 Area 4                        and no evidence of follow-up inspections or
                               routine exterior maintenance.
 Santa Ana
                               Personal property left in home, and
 Area 5                        structural problems.

We corroborated that these problems existed during our visits to 16
properties. Several of the properties we visited were not properly secured
or maintained. For example, one of the homes in Washington, D.C., was poorly
maintained (see fig. 3), had an open front window and rear door; beer
bottles inside; and, although the grass in the front yard had been trimmed,
the backyard was overgrown with brush and weeds. A property in Philadelphia
that was listed for sale by the contractor still had the previous
maintenance contractor's sign on the front door, unrepaired vandalism along
the side of the house (see fig. 4), trash in the rear courtyard, and an
unsecured opening into the house. A number of the properties we visited in
California had trash left in the yard, had been vandalized (see fig. 5), or
had unlocked doors or windows. HUD officials told us that because of the
nature of HUD's properties, some of which are in neighborhoods prone to
vandalism, they may never be able to keep all properties properly
maintained.

Figure 3: Unmaintained Washington, D.C., Property

Figure 4: Vandalized Philadelphia Property

Figure 5: Vandalized Electrical Box on California Property

The homeownership centers have been bringing these issues to the
contractors' attention and pressing for changes in the contractors'
performance by identifying problems through the monthly assessment reports
and by discussions with the contractors. For example, HUD's initial
performance assessment reports for InTown, which was awarded the largest
number of contracts (7 out of 16) and was assigned about 40 percent of the
initial property workload, disclosed problems in almost all performance
dimensions for all of the contractor's contracts. In May 1999, HUD
terminated the InTown contract covering the states of Iowa, Minnesota,
Montana, Nebraska, North Dakota, and Wisconsin and issued deficiency letters
on the other six InTown contracts in an attempt to spur corrective action.
However, InTown continued to have performance problems with the remaining
contracts. On September 22, 1999, HUD terminated all six of InTown's
remaining contracts,13 primarily due to the lack of sales, because at the
time its contracts were terminated, InTown had sold only about 9 percent of
the properties for which it was responsible.

Contractors' performance problems are also illustrated by the contractor
that HUD selected to assume responsibility for Iowa and five other states
after HUD terminated the InTown contract. The replacement contractor already
had three other contracts at the time that it was awarded the former InTown
contract area in May 1999. While HUD relied on this contractor to absorb
much of InTown's workload, HUD's assessments had noted serious performance
weaknesses with the company's existing contracts. For example, the
replacement contractor's performance in two of its existing contracts was
high risk for 2 of the 11 performance dimensions assessed by homeownership
center staff. Specifically, with regard to property maintenance in one of
these contracts, 64 percent of the contractor's properties inspected by HUD
staff and third-party contractors were found to be in less than satisfactory
condition. With regard to appraisal procedures in that same contract area,
almost half of the files reviewed did not have appraisals completed within
the required 10 days. According to HUD's guidance, the failure to obtain
timely appraisals can cause the Department to incur unwarranted holding
costs and could possibly result in the receipt of appraisals that are not
accurate.

In the 6 months after the contractor assumed responsibility for the InTown
contract, its performance on two of its existing contracts declined even
further; the contractor's performance was high risk in two to five of the
performance dimensions reviewed each month. The contractor's performance
regarding the Iowa contract was even worse; performance was high risk in
three to six of the dimensions reviewed each month. For example, the
homeownership center staff's assessments of the contractor's performance
under one of its contracts from June through September 1999 indicate that at
least 60 percent of the properties inspected were maintained in less than
satisfactory condition for all 4 months. These findings included
deficiencies such as properties that were not secured; properties that were
not clean inside, outside, or both; or properties that had damage caused by
roof leaks. During the same time period, the homeownership center staff also
continued to note high risk performance in the area of appraisal procedures.
For example, in July 1999, 72 percent of the files reviewed under one of
this contractor's contracts contained appraisals that were not received
within the required time frame. These problems notwithstanding, when HUD
terminated the balance of InTown's contracts in September 1999, it selected
this same contractor to handle the contract for Washington, D.C., and five
eastern states formerly handled by InTown. In the first 2 months that this
new contract was assessed, this contractor's performance was high risk in 3
of 10 performance dimensions for both months.

Limited Tools to Improve Contractors' Performance

While HUD has been effective in identifying performance problems with
certain aspects of the contractors' operations, it has not been as effective
in correcting them. HUD has made progress in correcting problems that
initially surfaced with its monitoring methods, but inconsistencies in the
homeownership centers' monitoring practices have made it difficult to
compare the property management contractors' performance and to track
contractors' performance over time. While the structure of HUD's contracts
encourages the sale of properties, experience to date has also revealed
limits in HUD's tools to address poor contractor performance in other areas.
Finally, HUD's termination of InTown has shown the limits to contract
termination as an enforcement option when few contractors are available as
replacements.

HUD's oversight methods have certain shortcomings that make it difficult to
compare and track contractors' performance over time. Some of HUD's initial
monitoring system problems have been associated with the third-party
contractors that HUD uses to help oversee the management and marketing
contractors. For instance, according to officials in HUD's Santa Ana
Homeownership Center, the contractor hired to check the condition of a
sample of properties in Southern California was not performing the required
inspections and appeared to be falsifying some inspection records. HUD noted
that pictures that the contractor claimed it took of properties during its
inspections were obviously not of the correct properties. HUD terminated
this property inspection contractor for inadequate performance. The Santa
Ana Homeownership Center absorbed the contractor's workload while arranging
for a replacement. However, because of resource constraints, HUD staff
performed fewer inspections than it would require its contractors to
perform.

Inconsistencies in the homeownership centers' development and reporting of
contractor assessments reduce the usefulness of these assessments for
tracking and comparing performance. For instance, according to HUD's
monitoring guidance, the monthly assessments are supposed to determine
whether the level of performance described under each performance dimension
constitutes a low, medium, or high risk. These determinations were reported
by the Santa Ana Homeownership Center in assessment reports only for May and
June 1999 and by the Denver Homeownership Center for April, June, and August
1999 but have not been reported by any of the homeownership centers for the
later months of 1999. In fact, of the assessment reports that we reviewed
covering the months of April through November 1999, over 70 percent did not
assign risk determinations to the various performance dimensions. In
addition, HUD does not use a consistent reporting format--while some
assessment reports evaluate the 11 performance dimensions specified in HUD's
contract-monitoring guidance, others assess 10 or 12 performance
dimensions,14 and while some assessment reports track monthly statistics
such as data on contractors' sales and inventories, others do not. The
usefulness of the information presented in the assessment reports also
varies. For instance, the October and November 1999 assessment reports for
one contractor list such performance deficiencies as unsecured properties
and properties with debris that should have been removed but do not give any
indication of how many inspected properties had these deficiencies. In
addition, assessment reports were not prepared for one contract for the
initial 2 months after a new contractor took over an InTown contract.

Additionally, through experience HUD is learning that it has limited means
to address poor performance by the contractors. Although the homeownership
centers have identified performance problems, have brought them to the
contractors' attention, and have pressed for improvements, these actions
have not always yielded the improvement desired. For instance, in September
1999, the Department issued a "letter of concern" to one of the contractors
regarding the contractor's inadequate progress in maintaining properties in
presentable condition. HUD also issued a deficiency letter regarding poor
property maintenance to another contractor. While a HUD official told us
that neither of these contractors was terminated and that their performance
subsequently improved, the assessment reports prepared by homeownership
center staff regarding these two contractors' performance show that as
recently as December 1999, over half of the properties reviewed for each of
these contractors were in less than satisfactory condition. Aside from
pointing out deficiencies in the monthly assessment reports, issuing letters
of concern or deficiency letters, or taking steps toward contract
termination, HUD staff do not have other tools available to address
performance deficiencies. For instance, the contracts do not provide for
penalties to enforce compliance with the contract terms. As part of its
audit of FHA's fiscal year 1999 financial statements, KPMG LLP, in a report
on FHA's internal controls, recommended that FHA devise a method of
penalizing management and marketing contractors that routinely do not comply
with performance requirements.15 The report noted that penalties would
effectively communicate the importance of strictly adhering to HUD's
guidelines.

Lastly, HUD's options for absorbing InTown's workload after terminating its
contracts were somewhat limited. Although HUD got a large response to its
initial solicitation, few contractors were found to be acceptable. HUD
evaluated proposals submitted by 49 contractors. However, after screening
those 49 contractors for significant weaknesses and/or deficiencies, HUD
found only 8 acceptable contractors and 1 capable of being acceptable. HUD
selected its seven initial contractors from this group of nine. Prior to
InTown's termination, HUD negotiated contingency contracts with three of its
existing contractors to take some of InTown's workload. However, the
Department was not able to obtain coverage of all the areas by its existing
contractors. Therefore, HUD's own staff were designated to handle six of the
states formerly covered by InTown until the Department could bring new
contractors on board. In November 1999, HUD issued a request for bids to
obtain contractors for those six states and, according to a HUD contracting
specialist, expects to award the contracts by June 2000.

but the Number of Older Properties in the Inventory Is Increasing

In addition to managing the acquired properties, a key component of the
contractors' responsibilities is selling these properties. After an increase
in the inventory in recent years, the number of properties is now beginning
to decline. The management and marketing contractors, hired for their real
estate sales expertise, are beginning to increase their sales of newly
acquired properties coming into the inventory. (See fig. 6.) As a result,
the inventory of properties as of February 2000 is down to approximately
47,000, from a high of 52,000 properties. However, the number of older
properties--those in the inventory longer than 6 months--has increased.

Figure 6: Number of New Acquisitions Into the Inventory Compared With Sales
by Month Since the Implementation of Management and Marketing Contracts

Source: GAO's analysis of data from HUD.

Beginning to Decline

HUD's inventory of foreclosed properties steadily increased during fiscal
years 1997 through 1999 but has been declining throughout fiscal year 2000.
During fiscal year 1997, HUD acquired 64,000 properties, sold approximately
59,000, and had an ending inventory of 30,000. In fiscal year 1998, the
inventory grew to over 39,000 properties; an additional 74,000 properties
were acquired and 65,000 sold. In the first 3 months following the
implementation of the management and marketing contracts (Apr. through June
1999), the inventory continued to increase as additional properties were
acquired and sales declined. For example, in April 1999, HUD acquired about
7,000 properties but sold only about 5,600. (See fig. 6.) By the end of
fiscal year 1999, HUD's inventory reached approximately 52,000 properties.

To explain the rise in the inventory, HUD officials told us that property
acquisitions were high because of foreclosures while sales were down because
of start-up problems experienced by the contractors--particularly InTown's
failure to sell properties. According to HUD officials, these start-up
difficulties included the contractors' difficulties in using HUD's
Single-Family Acquired Asset Management System. In addition, HUD temporarily
stopped sales of all its properties in February 1999 in preparation for the
transfer to the management and marketing contractors. HUD required the
contractors to inspect and reappraise all properties before they could be
listed for sale again. HUD officials cited the poor performance of InTown as
the main reason for the decline in sales of acquired properties.

By October of 1999, however, the contractors had increased their sales,
which, by that time, were outpacing acquisitions. For example, HUD acquired
about 6,000 properties in October 1999, while the contractors sold about
7,000 properties. As of February 2000, the inventory was down to about
47,000 properties. The structure of HUD's contracts, which provide full
payment to the contractors only after a property is sold, provides an
incentive for good sales performance. In addition, since the contractors
began selling properties in April 1999, HUD has experienced improvements in
some of its sales-related statistics. For example, the average sales time
has been reduced by 38 days--from 182 to 144--and the net recovery from
sales, the percentage of the home's value that HUD nets after paying all
costs associated with managing the property, increased from 79.7 to 80.2
percent.

That Have Been in the Inventory for 6 Months or Longer

Although the contractors have increased their sales of HUD properties, the
inventory of older properties, or those that have remained in the inventory
for 6 months or longer, has increased. The contractors are selling more of
the newer properties coming into the inventory. In February 2000, almost
20,000 properties were in the inventory 6 months or longer, about 8,000 of
these were in the inventory for a year or longer. This is up from about
13,000 properties that were 6 months or older in April 1999, and about 4,400
that were in the inventory a year or longer, when the management and
marketing contracts became effective. Properties that were in the inventory
for 6 months or longer accounted for 42 percent of the total inventory at
the end of February 2000--up from 30 percent in April 1999. The properties
in the inventory for 1 year or longer increased from 10 to 17 percent of the
total inventory for this same time period. According to a HUD-contracted
study,16 in the real estate industry, only about 2 to 3 percent of the
properties remain in the inventory for over a year. According to the
responsible HUD Division Director, the longer a property remains unsold, the
higher the likelihood that it deteriorates or is vandalized. Deteriorating
properties can have a negative impact on the surrounding community and the
market value of nearby homes. In 1995, we reported that properties in the
inventory for longer periods of time are sold for proportionately less.17

Figure 7: Percentage of Properties by Length of Time in HUD's Inventory in
April 1999 Compared With Percentage in February 2000

Source: GAO's analysis of data from HUD.

HUD is aware of the problems with older properties in the inventory, but its
efforts to address the issue have not been effective. HUD's headquarters
encourages the contractors, through frequent telephone calls, to focus on
the older properties. HUD officials told us that they have not yet begun to
lower the sales price of the older properties to encourage sales.18
Although, HUD has an extensive monitoring system to oversee contractors'
performance, the system does not specifically address contractors'
performance in selling aging properties. Thus, there are no specific
incentives for the contractors to give attention to the older, potentially
more difficult to sell properties, or penalties if they do not. In contrast,
the fee structure of the contracts provides an incentive for the contractors
to sell properties quickly, which could lead the contractors to sell the
newer, more marketable properties first. While selling properties quickly is
desirable, the older properties should not be allowed to deteriorate.

After a disappointing start with the forced termination of its largest
contractor, HUD and the remaining management and marketing contractors have
begun to increase sales. HUD's contracts provide incentives to sell
properties quickly. However, HUD has found that other performance
deficiencies persist on the part of many of the contractors, especially in
the area of property maintenance. HUD requires the contractors to secure and
maintain the properties that remain in the inventory so that they are not
blights to the surrounding neighborhoods and so that they can be sold at
their maximum values. HUD recognizes the importance of maintaining and
securing its properties and assesses the performance of the contractors on
this basis. However, given the continuing problems that HUD, KPMG, and we
have identified with property maintenance and security, HUD's available
incentives and enforcement methods, short of contract termination, are not
strong enough to ensure that the contractors are meeting their
responsibilities in this area. In its internal control report as part of its
fiscal year 1999 audit of FHA's financial statements, KPMG recommended that
HUD needs to devise a method of penalizing management and marketing
contractors that routinely do not comply with contract performance
requirements. We agree that a more effective mix of incentives and penalties
is needed.

Although HUD's inventory of properties has begun to decline, there has been
little emphasis on properties that have been in the inventory for a long
period of time. These properties tend to worsen the longer they remain
unsold and could possibly sell at a lower price than other properties in the
inventory. HUD's management and marketing contracts are focused primarily on
selling properties quickly and do not provide contract incentives or
penalties that could be used to focus more attention on HUD's older
properties. By not effectively addressing the aging of its inventory, HUD
may be allowing deteriorating properties to have a negative impact on the
value of surrounding properties and on the communities and may not be
accomplishing its goal of achieving a maximum return for its insurance fund.

To improve the effectiveness of HUD's property disposition program, we
recommend that the Secretary of Housing and Urban Development direct the
Assistant Secretary for Housing-Federal Housing Commissioner to develop more
effective methods, such as specific incentives or penalties, to encourage
contractors to reduce the number of properties that are in the inventory
longer than 6 months.

We provided HUD with a draft of this report for review and comment. While
HUD agreed with some of our findings and disagreed with others, it did not
express a view on our draft report's recommendation.

In commenting on the performance of the management and marketing contractors
in general, HUD presented a number of recent sales-related statistics and
asserted that they prove the success of the management and marketing
contracts. HUD also stated that property maintenance under the management
and marketing contracts is better, since sales have increased. Lastly, HUD
stated that our draft report did not consider most of the common real estate
performance measures such as the overall volume of sales, the financial
return on sales, the amount of time that properties are held in inventory,
and the percentage of properties sold to owner occupants in assessing the
contractors' performance. Contrary to HUD's comment, our draft report did
address common real estate performance measures such as the number of homes
sold, the net recovery from sales, and the average sales time. In addition,
our draft report recognized the recent increase in sales and the improvement
in sales-related statistics. We also used HUD's performance measures set out
in its guidance for assessing the performance of the contractors. As we
report, HUD's monthly assessment reports, which use these measures, show
continued contractor performance problems--particularly with property
maintenance. Lastly, while property sales are important, we believe that the
contractors should be held accountable for managing the properties as well
as marketing.

HUD commented that our draft report's discussion of contractors' performance
did not reflect two critical aspects of its monitoring approach. First, HUD
stated that while it expects contractors to comply with every contract
requirement, it noted that the degree of financial risk to the Department
from noncompliance is much greater for some requirements than others, which
results in varying actions from HUD. Second, HUD stated that the
contractors' sales performance and its contractor assessment reports
indicate that HUD's corrective actions have resulted in improved performance
by all the contractors except InTown. Our draft report did not distinguish
between the different types of noncompliance or prioritize HUD's performance
measures because HUD's guidance does not draw any distinction or priority
between the different required performance measures it uses to assess the
contractors. During our review, HUD officials acknowledged that they had not
established a priority ranking of the contractor performance measures. In
addition, our draft report concentrated on property maintenance in
discussing contractors' performance problems because we believe this is one
of the key performance measures in that it affects the value of the
property, the ability of the contractor to market the property, and the
property values of the surrounding community. Furthermore, as our draft
report stated, our analyses of the monthly assessment reports show that most
contractors had performance problems that continued, and in some cases
worsened, for the period we reviewed.

HUD agreed with our draft report's finding regarding inconsistencies in the
homeownership centers' monitoring of the contractors. HUD stated that to
address this problem, it had scheduled additional training for contract
monitors in July 2000.

HUD disagreed with our conclusion that the Department had limited
enforcement tools to address contractors' performance deficiencies. HUD
stated that it had an array of enforcement tools at its disposal and had
demonstrated a willingness to use them. Our draft report recognized HUD's
use of assessment reports, letters of concern or deficiency letters, and
contract terminations to address contractors' performance problems. However,
our draft also pointed out that the contracts do not provide for penalties
to enforce compliance with the contract terms. As a result, HUD has had
limited success in improving the poor performance of its management and
marketing contractors. As our draft report noted, two contractors to whom
HUD issued letters of concern or deficiency letters in September 1999 showed
continued and serious deficiencies in their maintenance of properties 3
months later. Moreover, our draft report showed that as of November 1999,
the contractors' performance under 11 of the 13 contracts was determined to
be "high risk" in at least one of the performance dimensions.

In commenting on our draft report's discussion of its inventory of
properties, HUD stated that its inventory of homes has been declining for 9
straight months and that this trend should continue. Although we reviewed a
different time period in our analysis--April 1999 through February 2000--our
draft report acknowledged that the inventory was beginning to decline at the
end of fiscal year 1999 as sales began to outpace acquisitions. We also
recognized that the slowdown in sales in April of 1999 was due to HUD's
activities related to the transfer of properties to the contractors, such as
requiring the contractors to inspect and reappraise all of the properties.
We also cited InTown's poor performance as one reason for declining sales at
the beginning of the transition to the management and marketing contractors.

With regard to our draft report's discussion of HUD's aged inventory of
properties, HUD noted that the inventory of these properties recently
declined from a high of 21,059 in December 1999 to 16,368 by April 2000.
While we view this as a positive sign, we note that the aged inventory as of
April 2000 is still higher than it was a year ago. Our draft report also
noted HUD's plan to sell aged properties at reduced prices to local
communities under its Good Neighbor Program. However, with an implementation
date of May 1, 2000 for the program, it was too early for us to review the
program or determine its effect on the aged inventory. Considering the large
number of aged properties and the effect that they can have on the
surrounding community, we still believe that HUD needs more effective
measures to encourage contractors to reduce the number of properties in the
inventory for over 6 months.

The full text of HUD's letter is presented in appendix I.

To determine HUD's experience with the contractors who manage and market its
inventory of acquired properties, we obtained information on the number of
single-family properties acquired by HUD, property sales, and inventory
balances for 1996 through 1999. We also reviewed HUD's statement of work for
the management and marketing contracts and the guidance provided to the
homeownership center staff for monitoring the contracts. We interviewed the
Director of HUD's Single-Family Servicing Division and officials at the
Philadelphia, Pennsylvania and Santa Ana, California Homeownership Centers,
which have a large portion of HUD's single-family property inventory. In
addition, we interviewed officials from three of the contractors operating
in the jurisdiction of these homeownership centers. We also reviewed prior
reports on this issue by HUD's Office of Inspector General.

To supplement our review of HUD's and its contractors' practices and
processes, we visited and observed 16 homes in the Washington, D.C.,
Philadelphia, Chicago, and Dallas areas. Ten of these homes were selected
from a nationwide statistical sample of foreclosed properties developed for
our 1999 review of HUD's foreclosed property management process. We also
visited six homes selected from a random sample of homes in Fontana,
California. We limited our selection to the homes that had not been sold and
were thus still being managed and marketed by the contractor.

To determine the current status of HUD's management and marketing contracts,
we interviewed HUD's chief procurement officer and his staff. We obtained
and reviewed all of HUD's contractor assessment reports for April through
November 1999. Our primary focus in this analysis was on the risk
determinations--assessments of the extent of performance problems--made by
HUD's staff with regard to the contractors' performance on each of the 11
performance dimensions. In those cases where HUD provided an explanation of
the extent of performance problems but did not label them as a low, medium,
or high risk, we applied HUD's criteria to arrive at the risk level depicted
by their findings.

We conducted our review from July 1999 through April 2000 in accordance with
generally accepted government auditing standards.

As arranged with your office, unless you publicly release its contents
earlier, we plan no further distribution of this report until 30 days after
the date of this letter. At that time, we will send copies to the Honorable
Barney Frank, Ranking Minority Member, Subcommittee on Housing and Community
Opportunity, House Committee on Banking and Financial Services; the
Honorable James A. Leach, Chairman, and the Honorable John J. LaFalce,
Ranking Minority Member, House Committee on Banking and Financial Services;
the Honorable John Kerry, Ranking Minority Member, Senate Subcommittee on
Housing and Transportation; the Honorable Susan M. Collins, Chairman, and
the Honorable Carl Levin, Ranking Minority Member, Senate Permanent
Subcommittee on Investigations; the Honorable Phil Gram, Chairman, and the
Honorable Paul Sarbanes, Ranking Minority Member, Senate Committee on
Banking, Housing, and Urban Affairs; and the Honorable Fred Thompson,
Chairman, and the Honorable Joseph Lieberman, Ranking Minority Member,
Senate Committee on Governmental Affairs. We will also send copies of this
report to the Honorable Andrew M. Cuomo, Secretary of Housing and Urban
Development; the Honorable William C. Apgar, HUD Assistant Secretary for
Housing-Federal Housing Commissioner; and the Honorable Jacob J. Lew,
Director, Office of Management and Budget. We will make copies available to
others upon request.

If you or your staff have any questions about the material in this report,
please call me at (202) 512-7631. Major contributors to this report are
listed in appendix III.

Stanley J. Czerwinski
Associate Director, Housing and
Community Development Issues

Comments From the Department of Housing and Urban Development

Contractors' Performance Dimensions to Be Reviewed by Homeownership Center
Staff

According to the Department of Housing and Urban Development's (HUD)
monitoring guidance, homeownership center staff are to assess the following
11 dimensions in order to evaluate the management and marketing contractors'
performance:

1. Claims Review: This performance dimension encompasses such objectives as
ensuring that the contractor inspects properties within 24 hours of
acquisition and reconciles the inspection reports with the claims filed by
the mortgagees to confirm that the mortgagees completed all maintenance and
repair actions for which they requested reimbursement. According to HUD's
guidance, the primary risk associated with this performance dimension is
that the contractor will not initially inspect the properties within the
24-hour time frame, which threatens HUD's ability to enforce the mortgagee's
responsibilities to preserve and protect the Department's assets until the
property is transferred. Another of the risks mentioned in HUD's guidance is
that, should the contractor fail to review the reimbursement claim from the
mortgagee, the Department could pay for items not completed or completed
incorrectly by the mortgagee.

2. Property Maintenance: This performance dimension encompasses such
objectives as determining if the contractor is meeting its obligation to
secure and maintain all of the properties for which it is responsible,
ensuring that the contractor is performing routine inspections of its
assigned properties and that the properties are secured, and ensuring that
proper notifications are made to inform local authorities of HUD's ownership
interest in the property. According to HUD's guidance, the risks associated
with this dimension are that the contractor's failure to promptly perform
the property maintenance functions may result in declines in property
values, adverse impacts on the communities where the properties are located,
and health and safety hazards to the community.

3. Appraisal Procedures and Monitoring: This performance dimension
encompasses such objectives as determining if the contractor is meeting its
obligations to (1) obtain appraisals within 10 days of a property's
acquisition and (2) ensure that the appraisal value is appropriate and
reflects true market value. According to HUD's guidance, the primary risk
associated with this dimension is that the contractor will influence the
appraiser to underestimate the market value to facilitate a quick sale of a
property, which could diminish the sale price and result in a lower return
on sale to HUD. Another risk mentioned in HUD's guidance is that the
contractor's failure to obtain timely property appraisals will cause the
Department to incur unwarranted holding costs and could possibly result in
the receipt of appraisals that are not accurate.

4. Property Listing for Sale Procedures: This performance dimension
encompasses such objectives as determining if the contractor is meeting its
obligation to list properties for sale, ensuring that the listings are done
in accordance with contract requirements, and ensuring that the contractor
is displaying accurate and consistent information on all properties across
all methods of advertising. According to HUD's guidance, the primary risk
associated with this dimension is that the contractor will not follow
contract requirements for listing properties, which could result in listing
properties below market value, thus causing a financial loss to the
Department. Another risk mentioned in HUD's guidance is that the
contractor's failure to perform in accordance with the contract requirements
when listing the property for sale could cause the Department to incur
additional costs if the property is not properly inspected and listed for
sale.

5. Sales Procedures: This performance dimension encompasses such objectives
as determining if the contractor is meeting its obligation to appropriately
accept offers on the properties listed for sale, ensuring that the
contractor is using electronic bidding, and ensuring that the contractor is
accepting the highest acceptable offers within the thresholds established in
its contract. According to HUD's guidance, a primary risk associated with
this dimension is that the contractor will accept unnecessarily low offers
on the properties in an attempt to facilitate quick sales. Doing so not only
presents a risk to HUD's financial returns, but also affects the communities
where the properties are located because it could give the perception to the
real estate industry and to the public that HUD is only interested in
"dumping" its properties quickly without attaining the highest net return
possible.

6. Sales Closings: This performance dimension encompasses such objectives as
determining if the contractor is meeting its obligation to close property
sales within established time frames (30 to 60 days), ensuring that the
contractor is forwarding complete and accurate closing documents to HUD's
closing agents, and ensuring that the sales closings are handled by HUD's
closing agents and the proceeds are received by HUD as soon as possible
following sales closings. According to HUD's guidance, numerous risks to the
Department are associated with this dimension. For example, delayed sales
closings could cause the Department to incur undue holding costs and
increase the chance of vandalism or damage to properties, resulting in a
potential loss of revenue to the Department.

7. Single-Family Acquired Asset Management System (SAMS) Data Entry: This
performance dimension encompasses such objectives as determining if the
contractor is meeting its obligation to perform daily data entry into SAMS
and ensuring that the data in SAMS correspond to the current status of each
property. According to HUD's guidance, a primary risk associated with this
dimension is that the contractor will not maintain the SAMS database or
intentionally misrepresent the information in the system, which could leave
the Department unable to determine the value of its assets and the number of
properties of which it must dispose.

8. Rental Process: This performance dimension encompasses such objectives as
determining if the contractor is meeting its obligation to maintain rental
properties in accordance with the lease requirements, ensuring that the
contractor is collecting rental income on a monthly basis and depositing it
as appropriate, and ensuring that the monthly rents charged are based on
fair market rental values. According to HUD's guidance, the primary risk
associated with this dimension is the loss of rental income if the
contractor does not perform this function in accordance with contract
requirements.

9. Occupied Conveyance Process: This performance dimension encompasses such
objectives as determining if the contractor is correctly processing occupied
conveyance requests (requests for occupants to remain in a property
following its transfer to HUD), ensuring that the contractor is inspecting
any properties for habitability when an occupied conveyance request has been
received from the occupant, and ensuring that the contractor is establishing
a fair market rent that is based on the rents in the area. According to
HUD's guidance, a risk associated with this dimension is that the contractor
will not comply with the contract requirements and prevent potentially
eligible occupants from remaining in a property for a limited period of
time.

10. Defective Paint Issues: This performance dimension encompasses such
objectives as ensuring that a Certification of Inspection for Defective
Paint Surfaces is on file for any property constructed prior to 1978 and
ensuring that any defective paint treatment is performed satisfactorily.
According to HUD's guidance, a primary risk associated with this dimension
is that if a property where defective paint has been detected is purchased
by homeowners with children under the age of 7, the contractor's failure to
treat the defective paint surfaces could result in harm to the children.
Another risk mentioned in HUD's guidance is that if the contractor fails to
perform repairs necessary to correct defective paint, the sale of the
property may be affected, causing it to remain in inventory for a longer
period of time.

11. Process Observation: This performance dimension encompasses such
objectives as determining if the contractor is meeting the entire
contractual obligation to perform management and marketing functions,
ensuring that the contractor's key personnel have not changed without prior
approval by HUD staff, ensuring that the contractor has developed a written
procedures manual for its employees to follow, and ensuring that the
contractor is inspecting the work of its subcontractors. According to HUD's
guidance, the primary risk associated with this dimension is that the
contractor will not properly perform the functions of the contract, thus
resulting in a loss of revenue to the mortgage insurance fund, possible
vandalism to HUD's properties, and an adverse impact on communities where
properties are located.

GAO Contacts and Staff Acknowledgments

Paul J. Schmidt (312) 220-7681

In addition to those named above, Jacqueline Garza, John McGrail, Stan
Ritchick, Stewart Seman, and Leigh Ward made key contributions to this
report.

(385810)

Table 1: High Risk Performance Dimensions for Contractors
in June and November 1999 12

Table 2: Property Maintenance Problems Noted by HUD in the
November 1999 Assessment Reports 14

Figure 1: HUD's Inventory of Single-Family Properties at the
End of Fiscal Years 1996-99 5

Figure 2: Contract Areas 8

Figure 3: Unmaintained Washington, D.C., Property 15

Figure 4: Vandalized Philadelphia Property 16

Figure 5: Vandalized Electrical Box on California Property 17

Figure 6: Number of New Acquisitions Into the Inventory
Compared With Sales by Month Since the
Implementation of Management and Marketing Contracts 22

Figure 7: Percentage of Properties by Length of Time in HUD's
Inventory in April 1999 Compared With Percentage
in February 2000 25
  

1. HUD defines a single-family property as a residential dwelling of one to
four units.

2. See Single-Family Housing: Improvements Needed in HUD's Oversight of
Property Mangement Contractors (GAO/RCED-98-65 , Mar. 27, 1998) and
Single-Family Property Disposition Program (99-AT-123-0001, Sept. 17, 1999).

3. HUD's four homeownership centers administer the single-family housing
functions formerly performed by 81 HUD field offices. The homeownership
centers are located in Atlanta, Georgia; Denver, Colorado; Philadelphia,
Pennsylvania; and Santa Ana, California.

4. The contractor's fee is calculated by using a "price factor," or a
percentage of a property's price, specified in the contract, as agreed upon
by the contractor and HUD. The first payment installment is calculated by
multiplying the price factor--a specified percentage--by a property's
listing price; the contractor receives 30 percent of the resulting product.
The second payment installment is calculated by multiplying the price factor
by the property's net sales price and then subtracting the amount of the
first installment.

5. We also discussed HUD's process for monitoring the management and
marketing contractors in our report entitled HUD's Loan Origination and
Foreclosed Property Management Processes (GAO/AIMD-00-41R , Nov. 19, 1999).

6. These performance dimensions assess such tasks as claims review, property
maintenance, appraisal procedures and monitoring, and sales procedures. (See
app. II for a further discussion of the performance dimensions that
homeownership center staff are to review.)

7. The homeownership center staff must justify, in writing, any assessment
of low risk where more than 5 percent of the properties surveyed resulted in
findings of noncompliance.

8. The broad-listing broker places each property on a local multiple-listing
service and answers inquiries regarding the property.

9. The 10 contracts reviewed include the replacement contractor for the one
InTown contract that was terminated in May 1999.

10. In many of the monthly assessment reports evaluating contractors'
performance, HUD staff provided a narrative but no clear statement of their
risk determination for each performance dimension. Where there was no risk
determination made by HUD staff, we applied HUD's criteria to arrive at the
risk level depicted by their findings.

11. Three contracts were not assessed in November 1999. As table 1 shows, an
assessment report was not produced for one contract, another did not have a
replacement contractor yet, and the last was split between Philadelphia
Homeownership Center staff and two replacement contractors.

12. These data exclude the assessment reports related to the InTown
Management Group contracts.

13. HUD has referred the principals of InTown to the Office of Inspector
General and the Department of Justice for criminal investigation.

14. Some assessment reports included "tax payment and invoice processing" as
a performance dimension.

15. This report was issued on February 24, 2000, and it is thus too early to
assess HUD's actions taken in response to the report's recommendations.

16. Industry Benchmarking and Best Practices Report, U.S. Department of
Housing and Urban Development, Single-Family Property Disposition, Business
Process Reengineering, Andersen Consulting (Mar. 27, 1997).

17. See Property Disposition: Information on HUD's Acquisition and
Disposition of Single- Family Properties (GAO/RCED-95-144FS , July 24,
1995).

18. On March 1, 2000, HUD announced a new Good Neighbor Program where it
will sell properties that have been listed for over 6 months to local
communities for $1. The program is too new for us to know what effect it may
have on HUD's inventory of older properties or on the fund.
*** End of document. ***